One of biggest benefits of having a 401(k) is the company match. If you have a company match on your plan, that means that your employer is taking an active, vested interest in your financial future.
With a match, when you contribute to your 401(k), your employer will also add money to your account by “matching” a set percentage of what you contribute. This is a great way to get a little extra juice for your retirement savings.
When you start contributing to your 401(k), it’s a good idea to understand how your company calculates their match and how it’s made, in order to know how much you should contribute if you don’t want to leave any money on the table. Remember, a match is free money!
Types of Matches
There are two predominant types of matching programs your employer may offer.
A percentage match is where your employer will match a percent of what you contribute to your 401(k). A common example would be something like “50% match up to the first 4%.” In this example, the employer would match 50% of the contribution that you make, up to 4% of your salary. So, if you contribute the 4%, you’ll get a 2% matching contribution from your employer. Make sense? In this example, the 4% figure is the match ceiling – you are welcome to save more than 4% of your salary, but the employer would stop their matching at that 4% level.
A dollar-for-dollar match is where the employer will match exactly what you contribute. Again, there is usually a cap in these types of programs. For example: if you contribute $100 per month, they’ll add $100. If you contribute $1,000, they’ll add $1,000. With a dollar-for-dollar match, in most cases, the employer will also set the match ceiling at a percentage of your salary.
Your Match Strategy
Regardless of which plan your employer uses, the tricky part is knowing whether it is based on your total contribution or the number of months you contributed. If it’s the latter, you’ll want to work with your HR team to make sure your contribution is spread out over the whole year. This can be an issue for higher-salary folks, who often get “maxed out” earlier in the year when saving into their 401(k).
So, once you understand how your company matches, you can implement your contribution strategy. Many folks will simply save whatever is needed to maximize their match and then save the rest of their money elsewhere.
It will of course depend on your individual situation, but keep in mind that the money in your 401(k) is under lock and key until age 59 ½; as a guiding principle it’s important to have a size-able chunk of savings that is “under your control” and doesn’t have the same penalties and restrictions attached.
Another tip when it comes to maximizing the match is to not rely on auto-enrollment into your 401(k). Plans differ greatly from employer to employer, but most auto-enrollment plans tend to start at rates lower than what you’d need to save in order to maximize your match.
Also consider other retirement plans that you have when deciding how much to save to your 401(k). Most individual retirement accounts (like IRAs, SEPs, etc) do not have a match associated with them. Therefore, it would be preferable to save to your 401k first before contributing to non-matched plans.
What is vesting?
If you’re researching exactly what your company matches, you’re probably seeing the word “vesting”. This is a key component of a 401(k) plan, and it’s important for you to understand how your plan vests.
Vesting is the idea that your employer match may not be “all yours” right away. There might be conditions behind it, such as you staying on as an employee for a certain period of time. If you can see a job or career change down the road, it would be important to understand exactly when you’ll vest with your employer contributions.
Now, the contributions that you make to the plan are always vested, 100%. If it’s your money going in, then it’s also your money right away and there are no conditions attached.